A History of the Theory of Investments Mark Rubinstein Reviewed by Craig W. French The Nobel Memorial Laureates in Economics: An Introduction to Their Careers and Main Published Works, 2005 Howard R. Vane and Chris Mulhearn Reviewed by Frank Jones View PDF… Read more
3rd Quarter (2006)
SURVEY OF THE LITERATURE: Credit Default Swap Spreads
Sanjiv R. Das and Paul Hanouna We review the literature on credit default swap spreads, which are fast replacing bond spreads as source data for analyzing and predicting credit risk. We review results that examine the basis, i.e. the difference between bond and CDS spreads, enabling the extraction of liquidity measures. Results show that pure… Read more
CASE STUDIES: Gas Caps and the Sherman Act
Jack L. Treynor View PDF… Read more
Stock Return Momentum and Investor Fund Choices
Travis Sapp and Ashish Tiwari Recent research by Gruber (1996) and Zheng (1999) has shown that investors are able to predict mutual fund performance and invest accordingly. This phenomenon has been dubbed the “smart money” effect. We show that the smart money effect is explained by stock return momentum at the one year horizon. Further… Read more
The Fundamental Law of Active Portfolio Management
Roger Clarke, Harindra de Silva and Steven Thorley The strategic perspectives and terminology of the fundamental law is a common framework in the practice of active portfolio management. For tractability, fundamental law theory depends on the simplifying assumption of a diagonal covariance matrix of security returns, though the matrices supplied to numerical optimizers are fully… Read more
Cap Weighted Portfolios Are Sub-Optimal Portfolios
Jason Hsu In this paper, we show that under a fairly innocuous assumption on price inefficiency, market capitalization weighted portfolios are sub-optimal. If market prices are more volatile than is warranted by changes in firm fundamentals, then cap-weighted portfolios do not capture the full premium commensurate their risk. The sub-optimality arises because cap-weighting tends to… Read more
Bruno de Finetti, The Problem of “Full-Risk Insurances”
Luca Barone We examine-in its different aspects-the problem of the risk due to hedging a set of insurances and, consequently, the problem of the retention levels, i.e., of the most efficient method to reinsure a part of such insurances to reduce the risk within the desired limits, while minimizing the loss of profit. The different… Read more
de Finetti Scoops Markowitz
Harry M. Markowitz In 1940, in the context of choosing optimum reinsurance levels, Bruno de Finetti essentially proposed mean-variance analysis with correlated risks. It was not until 1952 that Markowitz and Roy introduced mean-variance analysis with correlated risks into the financial literature. De Finetti solved the problem of computing mean-variance efficient frontiers for a particular… Read more
Bruno de Finetti and Mean-Variance Portfolio Selection
Mark Rubinstein Bruno de Finetti is generally regarded as the finest Italian mathematician of the 20th century. Among his many achievements, economists are familiar with his work on the axiomatization of subjective probability. To the surprise of many, a treasure-trove of other results in economics has recently come to light which until now has never… Read more
PRACTITIONER’S DIGEST
Volume 4, Number 3, (2006) View PDF… Read more